Video: Senate hearing: for-profit schools criticized on student loan debts

By M. Alex Johnson Reporter
updated 6/13/2011 12:35:35 AM ET 2011-06-13T04:35:35

This article has been revised to reflect clarifications .

Anna Meer of Waukesha, Wis., dropped out of college last year, convinced, she said, that she would never be able to repay crushing college loans.

"It added up to $30,000 to go there for one year," Meer, 23, said of Westwood College, a for-profit online institution where she had hoped to earn a degree in criminal justice so she could pursue a career in law enforcement.

Meer contended that Westwood, which is based in Denver, lured her into enrolling with promises of easy employment after graduation and pressured her to take on huge federally backed loans.

"They were taking advantage of the fact that I was young," said Meer, who sought — so far unsuccessfully — to join other former students from Wisconsin in a lawsuit a former student filed in August against Westwood and its parent company, Alta College Inc. of Denver, seeking repayment of all tuition and fees.

(A previous version of this article failed to note that the suit has yet to be certified as a class action — there is only one plaintiff on record — and that the judge's order moving it from U.S. District Court in Madison, Wis., to a state court has been stayed pending Alta's motion to reconsider.)

In a statement at the time the suit was filed, Westwood accused lawyers for the plaintiffs of "depreciating the quality education Westwood provides and the accomplishments of tens of thousands of satisfied students and graduates."

The case is one of several dozen that have been brought against for-profit colleges, many by former students who allege that unscrupulous recruiters advised them to run up huge debts — which they're saddled with for life because federal law doesn't allow them to be discharged through bankruptcy.

Citing extensive data that it said substantiated such allegations, the U.S. Department of Education issued tougher rules this month regulating for-profit colleges, whose students make up about 12 percent of all U.S. college students but represent 46 percent of all student loans in default, it said.

"It is seriously troubling that companies would find it acceptable to make these loans with the knowledge that such a high percentage of their students will be unable to repay them," Sen. Tom Harkin, D-Iowa, said last week at a hearing of the Health, Education, Labor and Pensions Committee, of which he is chairman.

"Think about it: If you were running a small community bank, would you make loans to any entity (when) you knew 50 percent of them would never pay it back?" Harkin asked.

Sharp disagreement over rules
The new regulations are called "gainful employment rules" because they apply to any college that mainly offers job-training programs, which describes most for-profit institutions. (Among them is the University of Phoenix, a for-profit institution that is also a sponsor of NBC News' Education Nation, a series of special reports, town halls and panels discussing the state of the American education system.)

Read the new regulations (.PDF)

The rules have been revised several times in response to objections from defenders of the schools, who contend that they will make it harder for low-income Americans to get the education they need to find worthwhile jobs.

They include several Republicans on Harkin's committee, all of whom boycotted last week's hearing. Sen. Mike Enzi of Wyoming, the committee's ranking Republican, said in a May 31 letter to Harkin (.PDF) that they elected to boycott the session because it was "motivated in part to embarrass the institutions."

Harkin and other Democrats, by contrast, complained that the rules had been watered down and noted that they wouldn't be fully enforced until 2015.

"You know, for the next three or four years at least, things are going to be pretty good" for the schools, Harkin said.

Representatives of the for-profit college industry, who weren't invited to testify, said the hearing was stacked against them.

"What you are hearing are distorted numbers. What you're hearing are numbers without context," said Harris Miller, president of the Association of Private Sector Colleges and Universities, the industry's trade group. "And that is because it is basically an extremely biased process."

In an interview with NBC News, Miller said: "We agree with the secretary of education that bad actors or schools which are not providing quality should have certain restrictions placed on them, and if they can't fix it maybe they have to go out of business. But this gainful employment rule is exactly the wrong way to do it."

U.S. backs $18 billion in loans
Behind the contentiousness are statistics like these, as reported by the Education Department:

  • 92 percent of students at for-profit institutions borrow to finance their tuition, compared to 59 percent at four-year, private, non-profit schools and 46 percent at four-year public schools.
  • The proportion of those loans that are federally issued or federally guaranteed is approaching 90 percent, representing $18 billion a year.
  • Students at for-profit colleges are nearly twice as likely to be unemployed upon graduation as graduates of other types of schools.

"There reaches a point where the education provided does not match the cost of the debt," Harkin said.

Students caught in the cross-fire blame the colleges, accusing them of gaming the system to load up low-income students with thousands of dollars of loans, knowing they'll still get most of their money from the government if the students graduate but default on the loans.

In a report it released last year, the Government Accountability Office, the investigative arm of Congress, published undercover videotapes of financial aid and admissions officers at 15 for-profit colleges, some of whom were shown giving advice that it said constituted called "fraudulent, deceptive and questionable marketing practices."

Some of the tapes did show school officials advising applicants to walk away because the financial burden might be too high — one was shown tearing up an application, carefully obliterating the applicant's Social Security number. But in others, would-be students were coached to falsify federal financial aid applications to get the biggest possible loans and grants.

At a Texas school, a financial aid representative was recorded advising a "student" not to list an inheritance from his aunt, in violation of state regulations.

"Frankly, in my opinion, they don't need to know how much cash you have," the official said. "A lot of people honestly answer it, and that's fine, but if you're doing it up here at the school, I pretty much tell them, 'That's why you have a tax return.'"

In another video, a representative of a school in California was recorded advising a "student" to list nonexistent dependents on applications to improve his eligibility for federally backed Pell Grants. The representative tells him: "Turn it in to me, and then I'll make the corrections according to what you're telling me."

Video: Excerpts from the GAO undercover investigation

'I feel like I'm farther away from my goals than when I started'
Eric Schmitt of Hampton, Iowa, tells a story like that, saying he still owes $45,010 on loans he took out to finance his associate's and bachelor's degrees in paralegal studies from the Cedar Falls campus of Kaplan University, where he enrolled in 2002 at age 27, and the Concord University online law school. The schools are run by Kaplan Inc. of New York, a unit of the Washington Post Co.

Kaplan told Schmitt that it had a 100 percent record placing graduates in the legal field and that he could expect to make $30,000 to $36,000 a year, he said in an interview last week with NBC News.

But three-quarters of the way through his studies at Concord, he said, he found out that the Iowa Bar wouldn't allow Kaplan students to take the bar exam. He has been unable to find any job in the legal profession since then because "the degree wasn't as impressive as it seemed," he said.

"I got a piece of advice once not to put down the school where I got my degree from at this early stage because I didn't want it to keep from getting an interview," he said.

Instead, Schmitt has taken jobs as a cashier, an assembly line worker at a pesticide plant, a census worker and a janitor.

"Do I feel like it was a worthwhile investment? No," he said. "I feel like I'm farther away from my goals than when I started."

Oddly, Kaplan listed Schmitt as having been successfully placed in his chosen career in documents it submitted to Harkin's committee. It said in a statement last week that it found Schmitt an "externship" with a law office that offered him a full-time job but that Schmitt resigned after two months.

Schmitt acknowledged that Kaplan placed him in the externship, but he said that it was unpaid and that he left because the office was in a "state of chaos." In testimony to the Senate committee, Schmitt said the lawyer later was suspended indefinitely. (The lawyer has not been publicly identified.)

"I don't know how they can really count that," Schmitt told NBC News.

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Harkin praised Kaplan at the hearing, saying it "stands alone amongst the large for-profit education companies for having taken what are, in my opinion, real and significant steps to reduce high withdrawal rates and high default rates." But he said that shouldn't "lessen what has happened to Mr. Schmitt and so many others who attended Kaplan and other career colleges around the United States."

For his part, Schmitt said he believes Kaplan "duped me."

"I trusted them based on the fact that they ... were receiving federal student loans," he said. "They took advantage of me and the taxpayer."

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